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Informist, Saturday, May 30, 2026

NEW DELHI – India cannot fully insulate itself from the global environment, which has become "materially more challenging" since the war in West Asia began, with a rise in crude oil prices, tightening of financial conditions, and weakening growth momentum across major economies, the finance ministry said Saturday. "For India, these external pressures are beginning to transmit, selectively but perceptibly, into domestic economic conditions," the ministry said in its Monthly Economic Review for May.

Overall, India's macroeconomic position in May reflects cautious resilience, which is also the near-term outlook, the ministry said. It has been over three months since the war in West Asia broke out and, according to the ministry, the duration of the disruption in the Strait of Hormuz "remains the single most consequential variable" for India's external and price outlook. "Should normalisation occur soon, the conditions for a broader-based recovery, supported by strong services exports and sustained investment commitments, are in place," the ministry added.

There are risks to India's inflation, growth, and foreign investment flows, all emanating from the global uncertainties. India is facing its worst energy crisis in decades due to the war in West Asia, with crude oil prices rising nearly 60% following the closure of the Strait of Hormuz in early March. Nearly 50% of India's crude oil and gas imports pass through this crucial waterway.

INFLATION WOES

According to the ministry, the inflation outlook warrants vigilance. In April, CPI inflation rose marginally to 3.5% from 3.4% in the previous month, but WPI inflation jumped much higher to a 42-month high of 8.3% in April from 3.9% in March. April marked a divergence between WPI and CPI inflation after they had moved broadly in line over the past year. "The high WPI inflation reflects the combined effects of the global oil price shock, a weakening domestic currency and statistical push from a low base," the ministry said.

This divergence between retail inflation and wholesale prices signals that upstream cost pressures are building, and the pass-on to consumers--which has been limited so far--may not be far behind, it said. "The recent hike in petrol and diesel prices may activate both direct and indirect transmission channels, and any further escalation in energy prices could narrow the existing cushion more quickly than anticipated," according to the report.

Oil marketing companies, after absorbing the higher crude oil prices for more than 75 days, increased the retail prices of petrol and diesel by INR 7.35 per litre and INR 7.53 per litre, respectively, in four tranches over the past two weeks. These higher retail fuel prices are likely to exert upward pressure on CPI inflation from May onwards. The hike in retail fuel prices "may activate both the direct and indirect channels of transmission of the global price shock to the country's retail inflation."

Transmission of higher commercial liquefied petroleum gas prices is already evident, according to the report. "Eating out has become dearer, while hotel rates have been rising at a much slower, steadier pace." Additionally, a "deficient monsoon" could add food price pressures on top of the energy-driven ones. "However, second-round effects and their persistence must be evident in the data for policy responses to be triggered," the ministry said. 

Food inflation, which guided monetary policy action for the most part of 2023 and 2024, had been benign for a while. The risks of a lower monsoon and a strong El Nino could again trigger food inflation. "Looking ahead, agricultural prospects for the upcoming kharif season are a source of both near-term comfort and medium-term caution," the finance ministry said. "In the coming month of June, if rainfall is deficient due to the development of El Nino, the transmission to food inflation, rural demand, and aggregate growth could be swift, adding to the existing inflationary pressures stemming from elevated global energy prices," it said. 

POLICY SUPPORT

The finance ministry noted that navigating FY27 will require agility across monetary, fiscal, and structural dimensions to safeguard growth momentum and keep inflation durably anchored even as the global environment remains uncertain. "...the confluence of elevated global energy prices, a depreciating rupee, rising upstream cost pressures and the prospect of a below-normal monsoon calls for sustained policy vigilance," it said.

The government has already taken fiscal steps like the INR 10 per litre cut in excise duty on petrol and diesel in March, and the Reserve Bank of India's Monetary Policy Committee has left the policy repo rate unchanged at 5.25% at its last policy meeting in April, choosing a "wait and watch" strategy to better respond to the evolving situation. 

The domestic fundamentals remain broadly intact, the ministry said, with foreign exchange reserves providing meaningful insulation against external shocks. However, with escalating geopolitical tensions, ongoing trade fragmentation, and changes in worldwide monetary and investment cycles, investors are becoming more risk-averse towards emerging market assets. 

There is sustained investor interest in the Indian economy despite the uncertain global environment, but higher repatriation and outward foreign direct investment flows continued to weigh on net FDI inflows, according to the report. India saw net FDI inflows of $1.57 billion in March, down nearly 65% on month from $4.44 billion, according to data released by the RBI on May 22.

Foreign portfolio investment outflows have also intensified following the escalation of the West Asia conflict. So far in 2026, FPIs have pulled out $22.75 billion from Indian markets, more than double the $10.92 billion they pulled out in the entire 2025. "Looking ahead, persistent global uncertainties, elevated crude oil prices, tighter global financial conditions and pressures on the Indian rupee are likely to keep investor sentiment cautious and contribute to continued volatility in portfolio flows," the finance ministry said. 

While the ministry said India's domestic fundamentals are broadly intact, it also pointed towards overall consumption demand facing headwinds in the coming months due to forecasts of a below-normal monsoon and likely moderation in economic activity. "...although domestic growth drivers remain broadly intact, ongoing global headwinds may gradually be transmitting into select segments of economic activity," it cautioned.  End

Reported by Priyasmita Dutta

Edited by Rajeev Pai

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